High risk/ Colossal reward

25th Nov '08 by rpcroft

19 comments 4701 reads

Falkland Oil and Gas owns 49% of a 50000 km² licence area in the South Falkland Basin.

BHP Billiton owns the other 51% and is committed to drill at least 2 wells by October 2010. Given the rough seas in the basin during winter, the drilling program is expected in the Nov 2009/ March 2010 period.

The 2006 competent persons report estimated the top 10 prospects to have potential to hold recoverable reserves of over 10 Billion Boe.

Over all targets the potential is over 60 Billion barrels.

In the event of drilling success FOGL will not own an oil well, nor an oil field but 49% of an oil province.

Recent FOGL presentation: www.fogl.com/documents/FalklandOilandGasLimited-CorporatePresentation-2008-03-18.pdf

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About the Author

Rpcroft

Premium Member

19 comments

promethean

25th Nov '08

Can you post up some links and info on this page? I'd like to know more about it... I need drip fed as I'm pretty ignorant about the falklands story.

rpcroft

25th Nov '08

BHP pulling its Rio Tinto bid is GREAT news for FOGL.

BHP has no Argentinian assets, Rio Tinto however have substantial Argentinian assets.

We no longer must fear BHP having to choose between drilling in the falklands or keeping hold of their newly aquired argy assets. Good.

We now have a fully cashed up partner with no conflict of interests.

Betasurfer

25th Nov '08

Hate to say it but the FOGL commitment is absolutely tiny, seen from BHP's perspective - $10m is peanuts for a company with a £23bn market cap on a bad day! BHP senior management probably barely even know they made the investment...

http://www.news.com.au/business/story/0,23636,22523477-31037,00.html

rpcroft

26th Nov '08

They will spend $100m drilling the 2 wells which they will notice, but that isnt the point: the point is that the Argentines would not have accepted BHP owning assets in Argentina AND in the Falklands.

This is now not a consideration.

Furthermore in the event of a successful drilling program that cash pile will be useful for development.

promethean

16th Dec '08

RNS from FOGL this morning giving an operational update.MV Fugro Meridian survey vessel has now commenced work and will provide surveys of the top 200metres of seabed to ensure the suitability of potential drill sites. The James Clark Ross (British Antarctic vessel) will provide wave and current meters to assess rig mooring suitability. The final survey will be commenced in January by the MV Fugro Saltire to develop plans for well casing.

The surveys will be carried out on 5 different prospects in the area. There is still no rig though... rpcroft - any news on that front?

rpcroft

16th Dec '08

None that i have heard prom, but BHP has two deep water rigs on long term contract so i dont see it as an issue. Once they have all the ground work done they will announce.

One possible issue going forward is dilution. I expect BHP will want to drill more than the 2 holes they are contracted to, if they do FOGL will need financing...given the share price and the oil price this might be more expensive than previously thought.

Murakami

15th Feb '09

http://www.guardian.co.uk/uk/2009/jan/28/falkland-islands-oil-drilling-impact

Ben Brewerton, a spokesman for Falkland Oil and Gas, says that drilling would still be viable at prices as low as $20 per barrel, given the size of the expected finds.

rpcroft

18th Mar '09

http://www.stockopedia.com/news/announcement/FOGL/090317fogl9517o.htm

So we are approaching the business end of proceedings with FOGL and as thought the drill program will be 4 holes, which means FOGL needs cash to meet its committment to part fund the drilling.

This funding will be met by another farm in.

I thought at the time and still think that the BHP deal was poorly negotiated. I believe FOGL was over-eager to find a partner and got a poor deal. I would have had as a pre-condition that the farm-in partner drill "x" number of holes and cover all associated costs, i think they could have gotten a fully funded program for a fraction of acreage.

Whether they could have got a better deal or not, i certainly think management has been negligent in not having secured a funding line or partner when oil going parabolic and cash was everywhere.

In the present economic environment i am a bit worried what terms a partner may demand....and the management's negotiating history doesnt fill me with confidence.

promethean

22nd Mar '09

Mentioned in the IC post -results...

Investors should expect a wave of junior mining and oil explorers with substantial overseas costs but no income to mimic FOGL and report results in dollars rather than pounds. The active ingredient is sterlings 30% dive over the past 6 months. It could have had a devastating effect on FOGL's 2008 results, as over 90% of it's costs are in foreign currencies... but by accounting magic, the company reports a much smaller loss thanks to a $2.48m currency gain.

Jackalope

20th May '09

@ rpcroft - have you looked at the other Falklands players? I agree with your sentiments that FOGL didn't negotiate very favourable terms on their farm in. It seems to me that if the other players hold onto their licences without susbstantial farm-ins, their shares will look very attractive if FOGL makes the find... my concern with FOGL is that whilst they are leading the charge in terms of actually getting the drilling done, the price they are paying in terms of loss of equity is looking substantial. Hence if the other players (Desire, Rockhopper etc.) haven't flogged all their equity in a desperate farm in, in a sense owning their shares is a cheaper option on the rise in valuations that will come about if FOGL make a find.

emptyend

20th May '09

FOGL's drilling schedule will be interesting (once BHP come up with a rig). I imagine they'll have a go at Loligo first - which (at 3bn bbls on its own) should attract plenty of attention! .....especially in Buenos Aires ;-)

But the rig is the central issue - once they are definitely going to drill, things may start to move ...though perhaps (judging from recent moves) some people in the market think that firm plans are now close?

oilretire

22nd May '09

News from RKH. Is this the first official discovery in the Falklands basin?

http://www.investegate.co.uk/Article.aspx?id=200905220700126902S

CPR reclassifies a previous exploration well, 14/5-1A, drilled by Shell, as a gas discovery
The resultant discovery has been named the Johnson structure and is now classified as a Contingent Resource
CPR confirms the original well report produced by Shell which identifies 165m net gas pay at14/5-1A

rpcroft

26th May '09

Jackapole, sorry for the late reply.

Yes i have looked at the others and they all have their chances. Regarding Desire and Rockhopper in the North the major problem that Shell, Amerada Hess and Lasmo saw after their 1998 drill program was the lack of a decent reservoir rock, in which oil could be hosted. That said there is a proven petroleum system there with the second best source rock ever, which, although immature in the main, is thought to have produced prodigious quatities of oil where it has been sufficiently cooked. Where this oil has gone is the question. All six wells in 98 were drilled in quick succession on previously determined sites so no inference could be taken from the first to better site the latter. It is now thought that oil may have migrated laterally for considerable distances. The drill campaign which Desire/ Acadia will conduct will drill two prospects, Liz and Ann, in the Northern part of the basin hoping to catch that oil and two in the undrilled southern part (Alpha the large gas play around which there is great optimism and jacinta/dawn, which has billion barrel potential). There are clear advantages in the northern basin: it has a better understood geology, with great source rock and a proven petroleum system, is in shallower water (which means they dont need expensive deepwater rigs) And as you mentioned they have retained 100% of most prospects. I anticipate the long suffering shareholders to have happy news on a rig very soon as rig availability has improved, and they are cashed up and drill ready.

Fogl on the other hand is in a geologically distinct basin, in deeper water which is undrilled and it has given away 51% of all prospects for a song. That said the area is massive and covered in targets and many of the targets are giant. They also have a first rate partner in BHP.

In terms of valuation, Fogl has potential for much more oil (it always seems ludicrous to mention it but the figure is 60 billion barrels over all targets, that would be 30 billion odd to FOGL) but the risk of drill failure in the untested South is much higher.

Border and Southern are very much a wild card as they are quite far out and testing an alternative theory. Basically they are presuming a wide spread source rock evenly distributed across the southern ocean and hoping for traps in the fold. Rockhopper/ Desire are drilling in what was a rift lake (think lake tanganika) in which rivers deposited lots of carbon and then sea level rose and the lake was submerged, FOGL are operating on what was the coastline and hoping for river deposited carbon sources (think congo/ niger rivers and east african offshore), they also will benefit if borders and southern's hypothesis is correct.

All in all it is going to be very interesting to see the results of the various campaigns.

I have a couple of notes to add:

1.I am unimpressed by FOGL's exclusion of retail shareholder's from their recent placement which is unethical.

2. The recent visit by the CJO to the falklands was reassuring and i would hope that some navy vessels will be on hand to deter any temptations Mrs Kirchner may have to bully the drill ships when they are down there.

Incidentally Jackalope what is your read on the likely response of Argentina to a) the drill campaign and b) to development of any oil/gas fields found.? Was the Argentine claim to the British shelf a declaration of intent. (I know the Kirchners are close to Chavez, and he has been pretty firy about it...stating willingness to fight "for South America" and he has russian subs)

emptyend

26th May '09

.I am unimpressed by FOGL's exclusion of retail shareholder's from their recent placement which is unethical.

How big was that placement? Did shareholders vote to give the authority for it at tha last AGM? Why would it be unethincal if they had asked for authority and been given it?

One thing is for certain on the politics - if ANY of the drilling finds material amounts of oil, there will be another war (IMO).....or at least some very heavy pressure to cut the Argies in in some way!

rpcroft

26th May '09

ee They raised 7.2m sterling net. At 73p a share. I wasnt at the AGM and the resolutions arent published on the website. I plan to enquire about the placement and will share the response.

I presume they did have a vote, even so if institutional investors hold 51% of a company and vote themselves the exclusive rights to cheap shares this must be unethical, surely. Else the institutional 51% could grant themselves the right to zillions of shares at a nominal cost and effectively take the 49% of the company owned by retail investors away from them through dilution at whatever price they chose.

Regarding cutting the Argies in in some way, i suspect this will be the way they try to take it. However i dont know how that will play in Argentina, they refused to strike a deal on production sharing a few years ago as we would not discuss sovereignty and the electorate down there may may feel strongly enough to make any such deal polictically implausible. If a deal could be struck I suspect the oil companies would end up with a much less favourable deal than they currently have.

If the finds are big enough to materially impact world oil supply figures then there would be considerable political pressure to work something out. (from China and the US, if not from chavez's and his friends)

emptyend

26th May '09

You will certainly find that the last AGM included a resolution to allow them to issue a certain percentage of shares without granting shareholders preferential rights to subscribe. Most likely this is limited to about 5% of the equity, to assuage the concerns you proffer. You are almost certain to find this was passed with a massive majority, because it is purely good sense to provide such financing flexibility in a strictly-limited manner!

Very many other companies do similar deals. Only last week Dana (DNX) raised over £50mn of equity though this method. There is nothing "unethical" about it - it would all have been fully transparent and authorised by shareholders at the AGM.

Betasurfer

26th May '09

Fully transparent, yes, but it would have been authorised by a massive majority made up by a large group of faceless institutional shareholders, most likely voting via proxy, without much, if any, regard for the rights or wishes of small shareholders, surely? I guess, that's off-topic as a much more general issue to do with majority rules Anglosaxon shareholder capitalism (and the herdlike behaviour of City institutions), not a suggestion that the FOGL management are doing something unusual/improper. Still, I agree with rpcroft that it doesn't seem terribly sporting for the little guys (who ironically may well have made a majority of those people physically attending the AGM!)...

emptyend

27th May '09

Fully transparent, yes, but it would have been authorised by a massive majority made up by a large group of faceless institutional shareholders, most likely voting via proxy, without much, if any, regard for the rights or wishes of small shareholders, surely?

If you don't like such things, then don't buy the shares! Or ANY shares, for that matter - because the same principles apply in the way that ALL companies are run (and are more likely to be used in practice by small companies such as FOGL that have no revenues!). Incidentally, a simple majority is usually sufficient (though it depends on the company's Articles of Association.....which of course shareholders have read, right? ;-))

Jackalope

8th Jun '09

@ RPCroft - thanks for the fairly comprehensive analysis above to the differences between the various companies in the area. I also liked your horse race analogy on the Desire forums with chances of around 1/3 of success but upside of around 1/100. I think these companies do remain very much in the punt sphere, but are probably worth a small flutter, especially given bullish oil futures.

What do I think of the likely Argentine response? Obviously hard to be certain, but worth noting that Argentine domestic oil production peaked in 1998 http://www.indexmundi.com/argentina/oil_production.html http://bp2.blogger.com/_kdcZbozWthI/Rd0UEObXqrI/AAAAAAAAADw/l0pNN0lihVA/s1600-h/image002.gif

and the country is on track to become a net importer of both oil & gas

http://www.businessmonitor.com/argentina_oil_and_gas_report.html

which means the domestic pressure if large reserves are found in "Las Malvinas" will be substantial. In addition, most of the other countries in South America are likely to support Argentina's claim. On the other hand, given Chavez's stranglehold on the majority of South America's oil resources, I can't help but think that the US would rather see the islands stay in British hands. En fin, the likely outcome will be some pressure to perhaps share the riches with the Argentines, but short of a full scale invasion (which remains unlikely over say the next 5 years), the Brits are likely to retain the upperhand whatever the Argentine mutterings and displeasure on the matter.

I'm off to the bookies...

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Rpcroft

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